Profitability
Two notions of the profitability that are commonly encountered include hypothetical profitability and observed profitability. Hypothetical profitability reflects the profitability of an infringer under a hypothetical licensing scenario.
As pointed out in an earlier decision herein by this Court (243 F. Supp. at 539), the very definition of a reasonable royalty assumes that, after payment, the infringer will be left with a profit. It is necessary to consider, as an element in determining the amount of the reasonable royalty, the fact that GP would be willing hypothetically to pay a royalty which would produce a reasonable profit for GP
— Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1122 (S.D.N.Y., 1970).
Observed profitability reflects the profit made under a patent. For example, observed profitability may encompass the profit an infringer actually enjoyed during the period of infringement.
[Georgia-Pacific factor 8 is the] established profitability of the product made under the patent; its commercial success; and its current popularity.
— Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y., 1970).
A reasonable royalty analysis focuses on hypothetical profitability.
[A]nticipated incremental profits under the hypothesized conditions are conceptually central to constraining the royalty negotiation[.]
— Aqua Shield v. Inter Pool Cover Team, 774 F. 3d 766, 772 (Fed. Cir. 2014).
Observed profitability may be probative as to the level of profit parties would have expected during hypothetical negotiation.
Parr's use of the actual profit margins that both Secure and Cyberguard experienced on products after that date was simply as a reflection of the profits the parties might have anticipated in calculating a reasonable royalty in the hypothetical negotiation.
— Finjan, Inc. v. Secure Computing Corp., 626 F. 3d 1197, 1210 (Fed. Cir. 2010).
Observed profit numbers do not limit a reasonable royalty, including:
the patentee’s actual incremental profit;
Following the announcement and launch of SAP's new hierarchical pricing engine, Pricer sales faltered. Versata's win-rate on sales offerings of Pricer dropped from 35 percent to 2 percent. While Versata retained many of its previously-won Pricer customers, Versata decided to discontinue heavy investment in marketing because SAP had destroyed its market.
— Versata Software, Inc. v. SAP America, Inc., 717 F. 3d 1255, 1259 (Fed. Cir. 2013).
the infringer’s actual incremental profit;
There is no rule that a royalty be no higher than the infringer's net profit margin.
— State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989).
the infringer’s total profits;
[I]t did err in treating the profits IPC actually earned during the period of infringement as a royalty cap
— Aqua Shield v. Inter Pool Cover Team, 774 F. 3d 766, 772 (Fed. Cir. 2014).
the infringer’s actual expectations about profit.
[T]he patentee's profit expectation may be considered in the overall reasonable royalty analysis [… it is not] an absolute limit to the amount of the reasonable royalty that may be awarded upon a reasoned hypothetical negotiation analysis under the Georgia-Pacific factors.
— Powell v. Home Depot USA Inc., 663 F. 3d 1221, 1238–39 (Fed. Cir. 2011).
Differences between observed profitability and hypothetical profitability may exist for a number of reasons:
observed prices may differ from prices under a hypothetical licensing scenario;
Based on that distinction, the district court correctly concluded that Apotex's actual pricing history sheds little light on how Apotex would have priced its omeprazole if it had obtained a license from Astra.
— AstraZeneca AB v. Apotex Corp., 782 F. 3d 1324, 1333 (Fed. Cir. 2015).
an infringer may raise their price in a hypothetical licensing scenario to accommodate higher licensing fees.
The infringer's selling price can be raised if necessary to accommodate a higher royalty rate, and indeed, requiring the infringer to do so may be the only way to adequately compensate the patentee for the use of its technology.
— Douglas Dynamics, LLC v. Buyers Prod. Co., 717 F.3d 1336, 1346 (Fed. Cir. 2013).
hypothetical licensing absent infringement may alter the competitive environment that an infringer faces.
Competition between those selling infringing ducts was admittedly fierce. Infringer Stahlin, however, cannot expect to pay a lesser royalty, as compensation for its infringement, on the ground that it was not the only infringer. Cf. Bros Inc. v. W. E. Grace Mfg. Co., 320 F.2d at 598, 138 USPQ at 358-59 (patent owner awarded lost profits)
— Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F. 2d 1152 (Court of Appeals, 6th Circuit 1978).
Increasing a running royalty rate may not decrease a licensee’s incremental profit dollar for dollar.
Thus, the district court seems to have simply assumed that any royalty paid by IPC would have directly reduced its profits, dollar for dollar. But that would not be true, in general, if IPC could have raised its prices (over what it actually charged for infringing sales) to account (fully or partly) for a royalty payment.
— Aqua Shield v. Inter Pool Cover Team, 774 F. 3d 766, 772 (Fed. Cir. 2014).
A hypothetical licensing environment may be unprofitable for the infringer when there are no gains from trade.
Ralph argues that no sane farmer would ever negotiate a royalty in excess of his anticipated profits. However, although an infringer's anticipated profit from use of the patented invention is "[a]mong the factors to be considered in determining" a reasonable royalty, see Georgia-Pacific, 318 F.Supp. at 1120, the law does not require that an infringer be permitted to make a profit.
— Monsanto Co. v. Ralph, 382 F.3d 1374, 1384 (Fed. Cir. 2004).